Looking back at 2020, we can all concur that this year has definitely thrown everyone a curveball when it comes to our finances. In fact, challenging would be quite an understatement and most of us would have experienced more downs than ups in light of the disarrayed state of the world economies.
Yet, even with the darkest clouds some silver linings did emerge and we have seen some sectors thrive amidst the gloom. So rather than despite the turmoil but because of it, some phoenixes managed to rise from the dust to favour the bold with good fortune.
If you had invested this year after the market correction, there’s a good likelihood that your investments performed fairly well. This is especially so for those who made the “right” calls, for example, investing in glove or technology companies’ stocks or in the gold sector.
For those lucky investors, there is certainly cause to rejoice given the current economic outlook, but how sure are you that you can strike another impressive home run any time soon?
Some investors may be content to treat their winnings as a one-hit wonder, and now turn their attention to enjoying the fruit of their investments in tangible forms such as upgrading their property or vehicles or just putting it aside for rainy days.
Nevertheless, positive returns on investments should not be regarded as the end-all but rather as a springboard towards other financial goals. For this to be achieved, some insight into your investment position is required and this can be ascertained with a few questions:
– Now that you’ve made some returns on your investments, what should the next step be? Should you simply take the profit or should youmake changes to your investments? How can you repeat your investment performance in the coming year(s)?
– If you have made money on your investments, did your net worth grow significantly? Are you happy with the quantum or do you feel it can be further improved?
– Have you tracked your overall investment performance from Day 1? Do you know the annualised returns of your investments? Are you satisfied with the returns? Unlike playing the lottery where you place your bets and keep your fingers crossed for your next windfall, investing is a process whereby consistent results can and should be obtained over the long term.
You probably will not get an exact repeat of your latest investment performance but having some control over your future returns sure beats leaving it to fate and chance. To this end, I would like to offer a different approach to have more consistent and repeatable results over time:
We’ve often heard this time and again but what does risk profile actually mean? Risk profile refers to how comfortable you are as an investor when the value of investments goes up and down over time. Do these movements cause you to lose sleep at night? If yes – then you need to dial it down and choose an investment with a slightly lower volatility. Having said this, your ability to take risk (i.e. risk capacity) is also a functionof the investment objective.
If you r investment objective is to save for retirement which is over 10 years away, then you are likely to have a higher capacity to take on more risk on this investment compared to other investments earmarked for shorter term goals. Similarly, if your aim is to grow your small investment capital significantly to meetyour financial objective over a shorter period (e.g. between 5-10 years) -then you will need to consider a higher target return on investment. It is likely that a fixed deposit-only profile might not be realistic for you to meet your goals.
While stock investments might be suitable for you, it will not be a good idea to put all your investable assets in the stock market alone. Similarly, while you might be a die-hard property investor, placing a very high percentage (e.g. above 50%) of your investable assets in property assets might cause liquidity issues should you need to dispose these in a short period.
Ideally you should have a right combination of low, moderate and high-risk assets that match your risk profile to be able to generate the ideal target weighted average growth rate required to help you achieve your financial goals. As a simple guide, a moderate risk investor should target to have a 10-20% allocation into low risk assets, 70- 80% in moderate risk assets and the remaining 10-20% in high risk assets. Based on this breakdown, the target expected return on the portfolio is somewhere between 6-10% p.a. in the long run.
Now that you have your overarching strategic asset allocation in place, it’s time to determine the target portfolio allocation of the actual investment to help you to keep tabs on its performance more effectively.
Let’s take the example of a moderate risk profi le investor who invests in a balanced portfolio comprising of 50% stocks and bonds. Should the stock market experience a bullish trend thereafter, the al location in stocks would rise to say 80%, causing him to be deemed as an aggressive risk profile investor instead.
Keeping an eye on the investments would prompt him to rebalance to the ideal 50:50 target allocation, thereby triggering the investor to apply the “buy low, sell high” philosophy by selling down on the stocks and reinvesting back into bonds. Similarly, you need to ensure your investments remain fit for purpose – retain the good performers and switch out from the non-performers. Is there a profit taking opportunity? If yes – consider locking in the profit while retaining the underlying investment if the prospects remain good.
If your investments are in profit – good for you. However, knowing this is not enough. You need to determine the annualised returns of your investments so that you know if this is in line with the expected returns of this asset class or otherwise. Similarly,if you have had a good run in investing this year and made a lot of profits- great. But has this translated to a meaningful growth in your networth?
If you’re not sure, then it’s time to start tracking your net worth on an annualised basis and more importantly look for ways to grow your overall net worth instead of just focusing on the performance of individual investments. When you diligently track your investment performance and net worth,you will be in a much better position to take the necessary steps to enhance it overtime.
While the steps above are not rocket science, they do require a consistent application over a long period of time if your aim is to grow your net worth optimally to achieve your financial goals.
As the saying goes, make hay while the sun still shines. Your recent investment returns may be the envy of your peers, but winning streaksare often flashes in the pan and not sustainable in the long run without adopting a systematic approach.
Nobody can predict how the economy is going to fare in the coming year given the volatility of the pandemic situation the world over.Rather than just sitting back and waiting to jump on the next hot investment idea with your fingers crossed, it’s time to reposition yourself to do well irrespective of the short term market conditions.
View your recent returns as one step further to increasing your net worth in its entirety and apply the above five step process to enjoy the prospect of growing your net worth consistently for many years to come.
First published in Smart Investor 11/12, 2020 Issue
Director of Financial Planning at Finwealth Management Sdn Bhd